FORT LAUDERDALE, Fla., June 13, 2023 - EZ-ERC discusses how nonprofits can benefit from government stimulus programs. Charitable giving reached a record high of $471.44 billion in 20201. As a result of this influx of endowments, which benefited many programs and processes, many nonprofit organizations may still be functioning under the incorrect assumption that they do not qualify for the Employee Retention Credit. Nonprofit leaders may also be hesitant to apply for the ERC because of the risk of an IRS audit or the potential negative perception of filing without having experienced a decline in revenue.

The truth is that nonprofit organizations still have time to benefit from the Employee Retention Credit for the 2020 and 2021 tax quarters by filing amended returns—and can do so with minimal risk.

The Employee Retention Credit is a payroll tax credit created under the CARES Act COVID-19 government stimulus bill (2020) and expanded under the Coronavirus Response and Consolidated Appropriations Act (2021). The ERC program was designed to reward small to medium-sized businesses and nonprofits for retaining employees during the pandemic.

Qualifying organizations can receive up to $5,000 of qualified wages per full-time employee per calendar year in 2020 and $21,000 of qualified wages per full-time employee per calendar quarter for the first three quarters of 2021.

COVID-19-Related Impacts on Nonprofits

For many nonprofits and their employees, temporary or total shutdowns and other financial impacts of COVID-19 and government COVID-19-related regulations were detrimental. Depending on their unique missions, some nonprofits saw an increased need for services while others were deemed nonessential or required heavy social distancing, which led to significant business interruptions to their day-to-day operations.

These interruptions led to decreased services and impacted jobs at mission driven organizations. According to a recent study published in the Journal of Consumer Affairs, the US nonprofit sector lost over 900,000 jobs during the pandemic and created financial hardship for many nonprofit organizations by impacting donor intent, revenues from fee–for–service programs, and grant funding availability.

These impacts affected each nonprofit sector differently: healthcare had the lowest job losses of −3.7%, while arts, entertainment, and recreation suffered the higher losses of −34.2%. Regardless of these losses, nonprofits that retained any of their employees during the COVID-19 pandemic may still qualify for the ERC even if they didn't see a decline in revenue.

Common Employee Retention Credit Misconceptions for Nonprofits

For organizations—especially nonprofits—looking to apply for the Employee Retention Credit, many misconceptions may make these organizations believe they don't qualify for this credit or that the risk is too significant.

Here are some of the most common misconceptions that prevent nonprofits from applying for the Employee Retention Credit even though they may be eligible.

Misconception #1: Nonprofit Donations and Grants Disqualify You for the ERC

Since most nonprofits survive on grants and donations, you may mistakenly believe you don't qualify, especially because donations surged during the COVID-19 pandemic.

According to Giving USA, 2020 was the highest giving year on record for NPOs.

Individuals, bequests, foundations, and corporations donated roughly $471.44 billion to charities in the United States.
Total charitable giving rose 5.1%, measured in current dollars, from the 2019 amount.
In 2020, the growth in total giving was driven by an increase in giving by individuals ($324.1 billion, an increase of 2.2% from 2019), the largest source of charitable giving.
Tax-exempt organizations like nonprofits typically don't qualify for tax credits, but the ERC is a rare exception. Furthermore, many donations and grants during the pandemic required funds to be spent specifically on alleviating the impact of the pandemic, leaving long-standing nonprofit programs and services in a deficit.

Misconception #2: You Can't Receive the ERC Because Revenue Did Not Decline During the COVID-19 Pandemic

If your revenue didn't decline during the pandemic, leadership might not have considered ERC eligibility. Yet, even if revenue increased due to the surge in donations, this doesn't necessarily disqualify you from eligibility. If a more than nominal portion of your organization was impacted you could still be entitled to ERC funds under the "full or partial suspension of operations" (or "FPSO") test.

Many nonprofits qualify for the ERC under the FPSO test due to programs and services being cut or paused. Your organization should consider which in-person programs were impacted through either a decrease in capacity or the suspension of those programs altogether when evaluating whether or not you qualify for the ERC.

Misconception #3: You're Risking Your Reputation by Claiming the ERC

Many small businesses found themselves in hot water when claiming SBA-backed COVID-19 relief loans through the Paycheck Protection Program (PPP) and some individuals were accused by prosecutors of fraud. Nonprofits may have heard these stories of CEOs "purchasing luxury automobiles, mansions, private jet flights, and swanky vacations" and been fearful of risking their reputations by applying to these types of programs. Likewise, nonprofit leaders may fear claiming the ERC will result in an audit that would jeopardize and impact the future success of the organization.

However, when done correctly, claiming the Employee Retention Credit can be done transparently and greatly benefit the organization. Nonprofits must maintain the proper documentation for calculating the ERC and proving eligibility to avoid the risk of an audit or noncompliance issues. Choosing the right third-party ERC firm to assist you with your claim can help you navigate the complicated ERC tax code to optimize your payout and minimize the risk of costly IRS audits.

Greatest Benefit for Nonprofits

Most nonprofit dollars and donations are restricted to specific spending. Personal contributions may be limited to one family, scholarship, or event. Grant funding might only be allowed for program materials, reporting, or administrative costs. Employee Retention Credit is unrestricted and can be used to bolster any programs or objectives within your organization. An increase in non-restricted funds can alleviate the burden of impacted services and be used to create or support new services or programs where your nonprofit's mission can have the largest impact.

Author: Maxwell Burns, CPA

Managing Director, EZ-ERC

1 2021 also saw record breaking giving at $485 billion yet, when looking at inflation, giving was down 0.7% in 2021 verses up 3.8% in 2020 (source).

CONTACT: pr@ez-erc.com

SOURCE EZ-ERC